As power generators turn increasingly from coal to natural gas, it's not just gas producers that benefit. Pipelines get a lift, too.
Last April an equal amount of power was generated by burning gas as by burning coal, according to the Energy Information Administration (EIA); it was a first for the domestic power industry (see NGI, July 2). Kinder Morgan's Tennessee Gas Pipeline (TGP) and Southern Natural Gas system (Sonat) have been enjoying the increasing gas demand from power generators, too.
"Let me give you some numbers that I find a little bit astounding," Kinder CEO Rich Kinder said to financial analysts last week during a conference call. "On our Tennessee system...natural gas power demand was up 8% for the [third] quarter and 20% year to date. On our...Sonat system in the southeastern United States, we're up 26% for the quarter and 47% year to date."
But fuel-switching is a fickle business, and generators will quickly return to coal when gas prices rise, as they have of late. Kinder was asked by an analyst about this. "Well, that's why I gave you the figures for both the third quarter and the year to date," he said. "I think, clearly, some of the moderation [in gas demand from generators] in the third quarter, to the extent that there is on the pipes, is also [due to] the cooler weather, at least during the latter part of the third quarter."
He conceded that there is a price at which gas-fired power becomes less economic and fuel-switching declines. "I don't think we're there for the most part, yet, even in the mid-$3.50s, mid-$3.00 range [for gas]...[W]e're just kind of watching it day by day."
Day by day, another potential demand center for domestic gas is evolving: liquefied natural gas (LNG) export, and Kinder's recent acquisition of El Paso Corp. has given it a footing there (see NGI, April 23). Kinder Morgan has the Gulf LNG Terminal in Pascagoula, MS, and the Elba Island LNG facility in Georgia. Last week Kinder affirmed plans to export from both, adding that both are approved by the Department of Energy (DOE) for exports to free trade agreement (FTA) countries.
"No one knows for sure what's going to happen on the non-FTA [export approvals at DOE]," he said. "We believe we will be able to put together a project at Elba that will be non-FTA, and it will have some optionality to expand if and when we got [non-FTA export approval].
"On the Gulf, we think much the same thing. We think we will be able to do something, although it's a little more preliminary than our efforts on Elba...Our whole process in this is very conservative, I think, we don't want to spend a lot of money cranking up, based on getting non-FTA approval." The company is pursuing binding commitments with LNG customers that are not conditioned upon non-FTA export approval. "And if you get non-FTA approval, there will be upside."
Kinder also told analysts that some of the company's El Paso Natural Gas Co. (EPNG) pipeline could be repurposed to carry oil production from the Permian Basin westward. "...[W]e continue to look at the potential to use portions of that [EPNG] system to convert it to other uses, perhaps moving crude oil west from the Permian Basin," Kinder said. "That's very speculative at this point, but there are a lot of opportunities."
Asked to elaborate on the idea, Kinder said, "we would not be converting all of it" to oil. An oil conversion project would still allow gas transportation customers to be serviced "at the present level of demand or whatever throughput they want to sign up for."
With multiple pipes running from the Permian to Southern California, Kinder could convert a portion of EPNG to oil service and still move gas as well. "The volumes could be very substantial, maybe 300,000 or 400,000 b/d," the CEO said. "...[W]e have had some interesting conversations with potential shippers on that line who are very enthusiastic. What we're seeing is there's continued increase in production in the Permian, particularly as these different stands are being exploited there.
"...[T]here's a lot of effort on a lot of people's parts to move this over to Houston," he said, adding that Kinder Morgan is looking at doing this, too. However, "given the dichotomy in prices between California and Texas, there's certainly some real interest, at the right price, under the right conditions, to move oil to the West. Again, it's all speculative at this point but kind of interesting to think about."
Converting part of EPNG to an oil line could help make up for a rapid decline in natural gas throughput volumes on the EPNG system. After peaking at an average daily throughput of 4,379 billion Btu/d in 2008, natural gas volumes transported on El Paso fell to 3,937 billion Btu/d in 2009, 3,356 billion Btu/d in 2010 and 3,109 billion Btu/d in 2011. The 2011 figure represents a 26% decline from volumes shipped in 2008.
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